Tuesday, October 23, 2012

Germany discusses fiscal transfers

German politicians are currently discussing changes to the system of fiscal transfers. Domestic ideas could easily become a blueprint for the Eurozone.

Creditors wanting to reduce their payments, debtors hammering on social solidarity. No, it is not the Eurozone or the latest negotiations on the EU budget. It is the German states which are in the middle of renegotiating the system of fiscal transfers between the German States. The German system of fiscal transfers is highly complex and consists of different layers and ways horizontally and vertically, to redistribute wealth across states to ensure an equal minimum standard of living. In total, roughly 1.5% of German GDP is redistributed across the country per year. Now, the biggest part of these fiscal transfers, the so-called Laenderfinanzausgleich, ie, horizontal transfers between the individual states, is about to change.

Yesterday, Chancellor Merkel’s Christian-democratic party (CDU) agreed on possible significant changes to the system of fiscal transfers. Elements of the CDU’s proposal sound familiar to those who follow the Eurozone crisis: receiving states should fall under stricter supervision and control from the Stability Council (which was established in 2010). The Stability Council should also get more powers to intervene. Breaching the national debt brake should automatically lead to sanctions. In extreme cases, the Stability Council could receive the right to impose higher taxes in states not sticking to the debt brake. Moreover, transfers should also take demographic changes into account.

This is the first time that a reform proposal actually comes from all states and not from the federal level or just the paying states. Of course, it is only a first proposal from one party and it needs more to change the system of fiscal transfers. However, yesterday’s proposal at least shows that the discussion has started.

It might look like a small domestic news item, but yesterday’s agreement within Chancellor Merkel’s Christian-democratic party (CDU) does not only send a strong signal to other German parties but also to the rest of the Eurozone. The principle of conditional solidarity lives on and the idea of a powerful and independent control institution also sounds familiar. Maybe Merkel’s party did not only decide on domestic matters but also sent out a blueprint for the Eurozone.